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FRC disappointed with the response to the 2018 UK Corporate Governance Code

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27 Nov 2020

The Financial Reporting Council (FRC) has published its ‘Review of Corporate Governance Reporting’ which is based on a review of 100 companies across the whole premium listed market.

The report presents the findings from the review and sets out the FRC’s expectations for the future application of the Code and reporting. It indicates that the overall level of reporting is disappointing and not what the FRC expects.

In the foreword Sir Jon Thompson, CEO of the FRC, makes the following point:

Much of what we have analysed is formulaic. Too often the objective of reporting appears to be to claim strict compliance with the Code concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting. This approach is a disservice to the interests of shareholders and wider stakeholders, and ultimately is not in the public interest; it undermines trust.  Worryingly, while some companies have sought to claim full compliance, we found on closer inspection that this was not the case.

Sir Jon makes clear that as the FRC transitions to becoming a new regulator, it expects to receive further powers to engage with companies about the quality of their governance reporting. The intention is to do this constructively; by working together with companies to develop the quality of reporting so that it achieves the highest standard for which the UK is known. However, the FRC will call out poor behaviour, where appropriate.  This is in addition to the Financial Conduct Authority (FCA) which recently announced that, going forward, it will be considering governance disclosures to inform decisions about the deployment of future surveillance and monitoring efforts.

As a result of the review, the FRC expects improved reporting in the following ways:

Governance standards:

  • Companies should maintain the high standards of the Code by taking the good practice demonstrated within it, applying it to the company and reporting on the approach by use of clear and meaningful explanations.

Leadership

  • Companies to have a well-defined purpose and to clearly show the progress towards achieving it.
  • Better assessment and monitoring of culture, including consideration of methods and metrics used.
  • Demonstrating commitment to diversity and inclusion through actions, such as improved succession planning, recruitment from diverse talent pools and responsiveness to board evaluation outcomes.

Stakeholder engagement

  • Companies should report on how the company has engaged with its key stakeholders, the steps it has taken to understand the views of stakeholders. In particular, there should be discussion of the issues raised, topics considered, and feedback received during engagement with shareholders and employees.
  • It should be clear how the board oversees stakeholder decisions, including how, and on what basis, stakeholder information is passed to the board, as well as on how the board has reached key decisions and the likely impact of those decisions.
  • Reporting should make clear the impact of engagement with stakeholders, including shareholders, on decision-making, strategy and long-term success. The FRC would like companies to provide more detail on their approach to measuring the performance of their engagement strategies.

Remuneration

  • Clearly show the impact of engagement with shareholders on remuneration policy and outcomes.
  • Clearly show the impact of the engagement within the workforce in relation to executive remuneration policy.

In conclusion the report provides the following message for boards to consider:

The strongest and most insightful reporting came from companies that described not only the initiatives that were introduced and processes that were followed, but also discussed their outcomes and what impact they had on the business. From risk review, through board evaluation to stakeholder engagement, measuring and reporting on impact means moving away from the boilerplate statements towards meaningful reporting. Giving more emphasis to the impact, while not disregarding thorough process, will also help companies better assess the effectiveness of their governance and generate better company performance and outcomes for shareholders and stakeholders.

A press release and the full report are available on the FRC website.  An FRC podcast is available here.

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